Germany offers Europe cheap loans to fight youth unemployment

European leaders warned on Tuesday that the continent's youth unemployment is reaching critical levels, and the German-backed plan to help puts a new focus on stimulus.

The European Union’s future is threatened by rising youth unemployment, especially in periphery countries, and urgent policies are required, namely making credit available to small- and mid-sized companies, country leaders and ministers said Tuesday.

But the preliminary plans to fight youth unemployment also indicate a shift in Germany's previously austerity-focused thinking toward a more stimulus-minded approach. Now, Germany is spearheading efforts to decrease youth unemployment, experts say, not just through the EU, but through bilateral deals with southern European countries like Spain, in what amounts to a form of indirect stimulus to balance the unpopular austerity-heavy policies that have dominated the crisis response.

“Europe is starting to show very problematic perspectives which cloud the future of the European project,” says Rafael Myro, applied economics professor in the Universidad Complutense de Madrid.

The political will and unity to fight youth unemployment, Dr. Myro adds, “are a strong sign that Europe wants to do something about spurring growth, and they are very significant, not so much because of the policies themselves, but because it signals a new approach.”

A new tack

Almost 1 in 4 Europeans under 25 years is unemployed, twice the general population’s rate. But the average masks the staggering joblessness among youth in some countries, like Spain with nearly 60 percent, Portugal and Italy with nearly 40 percent, France with 27 percent, and the UK with 20 percent, which contrasts with less than 8 percent in Germany.

Germany and France, in close contact with Spain and Italy, have been discussing an EU plan to fight youth unemployment for over a month, which will likely be spelled out during a summit of leaders in June, although details are still being worked out.

In essence though, the European Investment Bank would leverage 6 billion euros of EU funds through 2020 to offer up to 60 billion euros in loans to small- and medium-size companies that hire employees under 25. These companies not only employ most Europeans, but also create more net jobs than big enterprises.

That should help even out the lending imbalances within the eurozone, experts say. Right now, “an Italian or Spanish small- or medium-size enterprise doesn’t fund its investments at the same [cheap] rate as a German company,” said French Finance Minister Pierre Moscovici. “The channels of financing aren’t working.”

The plan is meant to at least contain the structural unemployment that threatens to undermine economic growth and consumption for years to come, especially in heavily populated Spain and Italy, but also in Portugal, Greece, Ireland, and even France.

“We are not willing to waste another minute in the struggle against youth unemployment. … The world will not wait for Europe,” said Spanish Prime Minister Mariano Rajoy, whose country would presumably be one of the biggest beneficiaries of the project. “We must act in order for citizens to see in Europe a hopeful project.”

German turnaround

The problem and promises are not new, but the circumstances are. It’s election year in Germany; the deficit-crisis appears under control, even if far from resolved; and most importantly, resentment against public cuts that are eroding the welfare model is making many lose faith in the European project.

As such, the plan is clever political response to growing public resentment against austerity-driven policies, as it will allow the EU to cheapen credit for struggling periphery economies, but without fiscally conservative, richer populations in northern Europe feeling they are rescuing unscrupulous governments, experts say.

“It’s a lot easier to sell the idea of economic stimulus geared to help decrease almost 60 percent youth unemployment in Spain than to offer money to build more airports,” says José García Montalvo, an applied economics professor in the Universitat Pompeu Fabra.

But the German turnaround is ultimately driven by international pressure, not just from European periphery countries, but from the US, Japan, and China. “Germany has been closed to any policies from the EU that offered economic expansion to the south, but the pressure was too big.”

Additionally, Germany is signing deals to channel cheap credit that its banks can access to small- and medium-size companies in Spain, Portugal, and Greece to bypass “the long route through European institutions,” as described by Finance Minister Wolfgang Schaeuble.

Under the plan, Germany’s development bank would lend its counterpart institutions in periphery countries at the low rates it has access to, which would then be lent to local companies. Berlin is also offering jobs and apprenticeships to southern Europeans.

Rescuing trust

Plans to fight youth unemployment are key not only to the economy but political integration. “We need to be more successful in our fight against youth unemployment, otherwise we will lose the battle for Europe’s unity,” Mr. Schaeuble said. If Europe cannot protect its welfare model, he said, “we would have revolution.”

But experts suggest the new drive to decrease unemployment is limited in scope. Case in point: Spain, says Dr. Montalvo. “We don’t have a problem of youth unemployment. We have a problem of unemployment in general, but if you solve that, you solve the rest.”

Spain’s youth unemployment is slightly more than twice the general population's, which is the average for Western countries. “Italy has a problem of youth unemployment, and so does Sweden, because theirs is three times as high” as their general unemployment and thus structurally harder to tackle, he explained.

“These measures are cyclical and have been implemented many times with only temporary impact,” Montalvo says, suggesting instead a banking union would be more effective to get credit flowing.